Here’s What Happens When You File Your Taxes Late
Everyone knows someone that has not filed their taxes, and that person seems to be getting by just fine. No “tax police” have knocked on their door, no assets have been seized – looks like missing the deadline is no big deal, right… right? Don’t be fooled. You know forces are at play behind the scenes. Here’s what really happens when you file your taxes late.
First comes the penalty for filing your taxes late
The 2017 penalty for filing your taxes late is 5 per cent of the balance owing, plus 1 per cent interest of the balance for each month you are delinquent. However, if you did not file a return in 2014, 2015 or 2016, you could face a 10 per cent penalty plus 2 per cent interest for each month owing.
Next comes the interest
Canada Revenue Agency (CRA) charges compound interest on outstanding amounts, starting right after the deadline. For 2017, that means compound interest starts on May 1, 2018. You are also charged interest on the penalty amount – and the interest rates can be adjusted by CRA every three months.
Should you be late with filing from previous years, rest assured that you are being charged compound interest on those amounts too, and any payment you make gets first applied to the backlog, not the most recent outstanding bill.
A word on compound interest
In the finance world, compound interest is the formula that maximizes your savings. The interest you earn on your principal sum is reinvested with the principal, so your money makes money. Basically, if you invested a dollar and it earned .20 cents interest, you now have $1.20 making interest. Compound interest grows your portfolio fast. On the flip side, when compound interest is applied to debt, your debt grows just as fast!
Let’s say you owe $1,000 in taxes and you file late. Your penalty is $50. Not so bad, right? But now you owe $1,050 and CRA immediately starts adding interest onto the debt. At 1 per cent you now owe an extra $10.50. In the first month of your late filing, you owe and extra $60.50. Next month that entire amount is compounded, making your $1060.50 debt worth $1071.11 (yes, CRA will round that penny up). Ignore those warning letters from CRA for another month and you compound that to $1,081.82. Each month interest is applied to the entire amount owing, not the original amount.
If you did not file in previous years and are subject to the 10 per cent penalty and 2 per cent interest, double the numbers in the example above.
Avoid this scenario
The longer you leave your filing, the more money you will owe and while CRA may not bang down your door making you think you “got away with it,” they will send you letters and keep track of every penny you owe. At some point you’ll get a collection letter and that is when your credit score is affected. Once your credit score is affected, you will have a very hard time getting a decent rate on a car loan or mortgage – all because you filed your taxes late.
AF Accounting Will Help
AF Accounting is the small business accounting firm in Quebec that helps business owners stay on track. Your company does not have to be incorporated to benefit from our a-la carté services, which include ongoing bookkeeping, one-time tax help, virtual CFO and more. When a professional accounting firm is tracking your accounting all year long, it’s easy to avoid filing your taxes late. Contact us today and learn what we offer, so you can relax knowing you’ll easily be able to file your return on time.
Wondering if your part time gig with Uber has to be mentioned on your return? Yes. Any gig income must be reported.